Korea's trade deficit with Japan totals $646 billion

Graphic by Bae So-young

By Kwak Yeon-soo

Korea's trade deficit with Japan over the past five decades illustrates how the nation's trade policies have relied on Japanese technology, according to Korea International Trade Association (KITA) and Korea Customs Service data, Sunday.

Since the two nations signed a trade pact in 1965 to resume cross-border transactions after Korea's 1945 liberation from Japan, Korea has never recorded a trade surplus with Japan. Instead, the deficit has totaled $646 billion over the past 54 years.

The annual deficit, which peaked at $36.1 billion in 2010, is still massive at $8.5 billion for the first five months of this year.

In 2018, Korea's trade deficit with Japan was $24.8 billion, the biggest among more than 250 trade partners. It was followed by some major oil-producing countries like Saudi Arabia ($22.3 billion), Qatar ($15.7 billion) and Kuwait ($11.5 billion).

“Korea may be one of the most profitable exporters in the world, but that's not the case with Japan,” said an official at Korea Institute for International Economic Policy.

“We cannot reduce imports from Japan because many of them are crucial components for our exports.”

On July 1, Japan announced it will tighten rules for tech exports of key materials to ratchet up pressure on Seoul. The Abe administration is demanding the Korean government resolve the issue of compensation for Koreans conscripted to work in factories and mines during the 1910-45 Japanese occupation.

Given that Korea's semiconductor industry is highly reliant on components and materials supplied by Japan, it is likely to be hit hard by Japan's export restrictions.

High-tech products are the biggest source of the loss with Japan, with semiconductors and chip making materials accounting for more than a third, according to the KITA.

To resolve the issue, the government vowed to accelerate localization in the materials sector by funding development of chip materials, components and equipment.

“The government has been working closely with industry experts to discuss ways to diversify imports, improve competitiveness of local production and develop essential chip materials,” Trade Minister Yoo Myung-hee said during a meeting to discuss possible countermeasures to Japan's export restrictions.

“We will use this as an opportunity to enhance the competitiveness of our key materials and equipment.”

However, some point out it will take some time to obtain the technical skills to replace imported goods from Japan. Thus it will likely weigh on the nation's tech industry and economy.

“The materials and component industry should not be satisfied with its external growth but continue to respond well to growing demands,” Korea Institute for Industrial Economics & Trade wrote in a report.

“The government also needs to approach this matter as a long-term task because there are problems concerning labor force and skills acquisitions.”

Previous Korean government administrations have agreed on the need to reduce the dependence on supply chains starting in Japan, seeing this as a fundamental reason for the large deficit.